Unit labor costs measure labor compensation relative to labor productivity.
Defined as compensation per unit of real output (see
Appendix II for a detailed
description of this index), unit labor costs are a better indication of business
profitability than labor compensation alone, and are the most crucial component
of the cost of doing business within a geographical region.

Labor compensation growth, over time, is directly linked to growth in labor
productivity. A workforce that is producing more output per person (i.e., higher
productivity) will experience higher growth in real earnings. This growth in
real earnings will not jeopardize a region's business competitiveness when
matched by commensurate productivity gains. Growth in labor compensation that is
not matched by productivity gains, conversely, will result in higher unit labor
costs and deteriorating business competitiveness.

Relative business costs have been a major factor affecting regional economic
performance. As U.S. businesses find it increasingly difficult to raise prices
due to greater competition from both home and abroad, relative business costs
will likely play an increasingly important role in business location decisions.
States or regions that maintain uncompetitive unit labor costs will see an exit
of capital and business formation to more competitive regions.

Table VII in Appendix I shows the
time series of unit labor costs for each state and the District of Columbia from
1990 through 2000. Not surprisingly, the results show a clear pattern of higher
unit labor costs in non-RTW states during the past decade. According to
Economy.com, only three RTW states in 2000-Florida, Utah and Virginia-had unit
labor costs above the national average (U.S.=100) while 11 non-RTW states
exceeded the average. In 2000, RTW and non-RTW states' unit labor costs averaged
93.2 and 98.1, respectively. Uncompetitive at the start of the decade,
Michigan's unit labor costs rose to 109.2 by 2000, ranking it second in the
nation behind New Jersey. See Chart
11.